State of the Industry 2019: Your Impending Pro AV Profit Problems

It must be difficult for the companies that make up the AV integration market — the ones still standing, not having been acquired by larger, faster-growing firms and those managing to avoid obsolescence by evolving networking capabilities while stubborn competitors went extinct — to resist the urge to believe they’re unbreakable.

The companies that make up the 2019 commercial AV integration market are, indeed, resilient.

Many fought through the “great recession.” They’ve survived convergence.

As the chasm between the AV industry’s largest and mid-sized companies widened, they’ve adjusted to those market challenges by learning to play to their strengths.

This year’s biggest paradox…

Our State of the Industry 2019, based on a survey of 137 integrators and consultants conducted in conjunction with NSCA, shows that the resiliency continues.

About one third of surveyed companies report that their 2018 revenues grew at least 10 percent over that of the previous year.

A strong majority of the market, 59 percent of those surveyed, report 2018 growth of at least 5 percent, and only 10 percent of companies dipped during the past year.

Over two-thirds, 68 percent, of companies surveyed for CI’s State of the Industry 2019 report say that their in-house backlog is up compared to its level a year ago. This, of course, is excellent news for AV integration firms, but it doesn’t tell the whole story.

“What seems weird is there is such a demand for what we do and our members are as busy as can be,” says NSCA executive director Chuck Wilson.

“I worry about how sustainable [many integration firms’] plan is because their gross profits are very lean compared to the overhead.” — Chuck Wilson, NSCA

“But when we look at our financial analysis and all the numbers, I worry about how sustainable their plan is because their gross profits are very lean compared to the overhead.”

It’s not news that margins on products and projects have been dwindling over the years.

When asked about typical hardware margin on projects, the number of surveyed integrators citing “between 1 and 10 percent,” in other words, miniscule, rose to nearly a fifth of the market this year. That’s up from only 11 percent last year.

“The rising cost of labor, the reduced margins and all that — I just worry that with so little margin for error anymore, do we have the right benchmarks in place?” Wilson asks.

“Do we utilize the research, the financial analysis, the labor standards to make sure that we have all of the details right about running our business in such a lean financial environment right now?”

Th at lean financial environment may put to the test many of the AV integration firms that are enjoying a backlog of projects.

Major Acquisitions Playing a Role

The calculated 8.6 percent growth is most certainly boosted by consolidation. The past year saw several headline-grabbing acquisitions:

“You’re going to have outliers who are seeing a great year, more than 20 percent growth. Perhaps some did business expansion.”

Will there be an economic downturn?

Beyond the next couple of years, however, “that’s when economists start to say, ‘Let’s be cautious,’” Wargo says. “There is some suggestion of a few things, a few metrics that may look a little less positive as we go out.”

It’s under those circumstances, in a less positive market, when companies’ profitability challenges will be more exposed.

The challenge for AV integration firms is not to get lost in the windfall of project backlog and revenue growth but to prepare for tougher times.

You’ll Need Networked AV & Service Contracts

One way to prepare for tougher times and to mitigate project profitability challenges is to migrate to a business model that relies more on service revenue.

The numbers reflected in the State of the Industry 2019 survey, however, show that the messages haven’t resonated enough to move the needle very significantly:

More than a quarter of those surveyed, 26 percent, earned $0 via service in 2018

One-third of the market earned between 1 and 5 percent of their revenue from service in 2018

Only 4 percent of the market can say that over one-third of their revenue stems from service

A disappointing 24 percent of companies even have a goal to earn at least a third of their revenue stemming from service by 2025

So why aren’t AV integrators earning more service contracts?

The reality is that not all AV integration firms are cut out for service — rather, some are extremely cut out for the project-based revenue model, according to NSCA’s Wilson.

“Some companies excel at being a systems contractor. They’re an integrator that chooses to go from project to project, and that is really just what they do. They’ve done it well enough in both the bid-spec and design-build worlds that they really don’t have to think about creating the lifelong clients. They want a backlog of projects, not a series of service calls. That’s not who they feel they are.”

Again, however, the risk is falling into that trap. That determined approach may work for one integration firm, but several others may falter due to microscopic profitability combined with lack of service revenue.

Figuring out HOW to do it

One of the challenges, Wargo points out, is making managed services profitable.

Indeed, 52 percent of State of the Industry 2019 survey respondents say their biggest obstacle to moving to more of an as-as-service or managed services model is figuring out how to create the necessary support infrastructure.

“As we move from hardware-based solutions to cloud-based and software-based solutions, it’s become increasingly necessary for an integrator to build that in some way, shape or form,” Wargo adds.

How AVI-SPL, the largest integrator, does it

AVI-SPL, the AV industry’s largest integration firm, is an example of a company that has figured out the managed services model.

CEO John Zettel told CI in 2018 that it’s a matter of adapting to what its enterprise customers need. Service, he says, is step two in the process. Step one is delivering consistent solutions across an enterprise platform.

“Then, on day two [it’s] serviceability and helping them to manage and drive utilization of their systems.”

In that regard, being able to offer customers a service model isn’t an option for forward-focused AV companies — it’s necessary for serving that enterprise clientele that, according to the 2019 survey results, 92 percent of integration firms serve.

Using these tips to talk to IT

The other component to this — and another drum continually beaten by CI — is the importance of networked AV.

The most influential technology purchasing decision maker within customers’ organizations, according to survey respondents, is an IT professional.

However, Wilson maintains that the majority of the AV industry — at least the companies still standing — has done a good job focusing on networked AV and adjusting to selling to IT professionals.

“As a whole, the AV industry has responded well,” he says. “Certainly, the manufacturers jumped all over this and their products are very IT-enabled.”

State of the AV Industry in 2019

It’s accurate and purposeful to point out AV integration industry’s profitability challenges that could escalate as the economy changes and project backlogs diminish — but it’s also, admittedly, kind of a buzzkill.

Consider the positive growth numbers for the market — nearly two-thirds of surveyed companies saw growth in 2018 and three-quarters of the market forecasts growth for their firms in 2019.

That’s complemented by a general state of optimism.

Asked about the overall current business climate, 59 percent of surveyed companies describe it as “very good” or “excellent.”

NSCA, which in its Financial Analysis of the AV Industry Report and its quarterly Electronics Systems Outlook papers projects AV integration industry trends, shares the optimism — at least in the short term.

The profitability problems, which may be academic in a healthy 2019 integration market, could hit integration companies hard if the economy turns.

Ask yourself these questions this year:

Do we grow?

Do we stay niche?

Do we look at acquisition?

Do we become a target for acquisition ourselves?

Where do we fit in the security space?

How do we fit into the maturing of the AV industry?

Where are the risks?

Where do we put up blocking maneuvers to keep competition from adjacent industries out of our space?

In 2019, the AV integration industry can’t sit back. If the economy slows or adjacent industries do a full-court press on traditional AV offerings — or both — what happens to companies that choose not to play in the IT environment?

What happens to those that aren’t able to offer the ongoing service their customers require? What happens to companies that fail to address profitability problems?

The good news is, like that mid-season football coach, there is time to identify and address deficiencies before crunch-time.

“There’s a lot going through my mind right now,” Wilson says of the integration market entering 2019, “but overall there’s no shortage of opportunity and there won’t be until 2021, in my estimation.”

Now is the time to work on your companies — not when the season is on the line.

About the Author

Tom has been covering electronics integration since 2003. Prior to being named editorial director of CI, he was senior writer and managing editor of CE Pro. Before that, he wrote for the sports department of the Boston Herald. Migrating to magazines, he was a staff editor for a golf publication and an outdoor sports publication.

Read More Articles Like This… With A FREE Subscription

Commercial Integrator is dedicated to addressing the technological and business needs of professional integrators who serve the small and midsize business market. Whether you design, sell, service, or install… work on offices, churches, hospitals, schools or restaurants, Commercial Integrator is the dedicated resource you need.

Comments

Excellent report. That said from my consultancy interaction and in reinforcement of the negatives part of this report I see:
* Awful margins the continued cancer
* No recurring revenue plan, improper staffing for a IT approach, no compensation programs to reward recurring revenue and the worst one… No real understanding on how to turn the ship while under repair.
* Growth without margin improvement is a nieve path to business survival.
* To many integrators continue to have to many GC’s as their customer. This means to many low margin bidding wars, no value added design builds. The IT director decision makers see the low gravitas/ desired IT knowledge of any type from the AV guys in the room.
* More competitive landscape from Voice/ Data IT partners who can bundle & install their solutions successfully. AV is easier now than ever.
Finally it’s shocking that per your report that only 1/3 of integretors plan more professional services with recurring revenue. The fact is they are so wrapped around the axile trying to protect margins on the bid they won, they have no time to work on the larger survival challenges outlined in this study. Good job.

Take Our Latest Quiz

Recommended For You

Organizations are seeing a boon when implementing AV over IP technology, and integrators are finding happy customers when installing AV over IP. In this webinar, you’ll learn exactly why you need AV over IP.

The one-hour webinar will discuss the basics of fiber cable, as well as how its bandwidth capabilities support today’s and tomorrow’s AV formats, and guidelines for specifying and installing fiber products.

Get the Magazine

Commercial Integrator is the first publication dedicated to addressing the business needs of professional integrators who serve the small and midsize business (SMB) market. Beyond products and installations, each issue tackles operational topics like job-estimating, project-bidding and big-picture market forecasting and more.

Get Our Newsletters

Stay up to date with the latest news and products for commercial integrators, sent straight to your inbox. With several options available, ranging from product coverage to the latest happenings of the industry, we strive to deliver the news you want in the most convenient way possible.